Wrong Rx for Social Security

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The National Commission on Social Security Reform seems to be
convinced that the treatment for anemia is-blood-letting. Instead
of finding.a way to revitalize the Social Security 6ystem, the
Commission is prescribing a bigger dose of what has afflicted and
weakened the system for d ecades. The Commission's $169 billi6n
bail-out plan fails to address Social Security's underlying
st.kuctural problem--Cong .ressis attempt to make it function as
both insurance and welfare. This unnatural and unworkable hybrid is
unfair to retirees, work e rs, and especially to the young, who are
forced to participate in a program that is inferior to private
sector alternatives. Ignoring the root ills of the system, the
Commission instead is trying to solve the prbblem by raising taxes,
cutting benefits, fo r cing those now outside the :System to climb
aboard the Titanic as it heads for the 'iceberg. The $40 billion
payroll tax hike would raise employment costs. The result: longer
unemployment lines, lower capital investment, and-slower economic
recovery. Rath e r than easing Social Security's financing
problems, the Commission's proposals could merely cause the economy
to deteriorate--weakening social security revenues and 'forcing
more extreme corrective action in the future. Raising payroll taxes
was supposed' t o solve Social Security's problems in 1977, when
Co'ngress passed one of the largest tax increases in the U.S.
history. it didn't then, and it won't now, because payroll tax
increases do not attack the system's basic problems and perpetuate
the structure t hat:has brought the system to the edge of
bankruptcy. Most of today's younge;r workers will receive a pitiful
return on their tax contributions. Anolther increase in taxes now
simply will reduce their'return still furthek. The Commission also
recommends i n creasing th;e tax on self-employed persons to the
tune of $18 billion by raising the base from three-fourths of the
combined employer-employee rate to the full employer-employee rate.
In return, they would be allowed to deduct half of the payroll tax
from taxable income. This is little more thAn a backdoor method of
financing Social Security from general revenue; 'it would
redistribute, not reduce, the tax burden. Slowing the growth 6f
benefits or allowing workers to opt out of the program are the only
mea n s of lowering this tax burden. Indirect general revenue
financing just robs Peter to pay Paul--and increases the burgepning
non-Soci-al Security budget deficit. Under the Commission's'plan,
Social Securit@ coverage would be extended to newly hired federal
employees and to::nonprofit groups now outside the system, and it
would end the right of state and local govern- ments to withdraw
from Social Security. By forcing new participants into the system,
this measure would only postpon6 the day of reckoning; it wo'uld
undermine sound private pension plans and torpedo the Civil Service
Retirement System. Moreover, it is clear that many Americans want:
to withdraw from Social Security. In 1982, for example, 172,000
employees;

2

f rom various organizations withdre w from the system primarily
because of soaring payroll taxes and the system's suspect solvency.
If Americans believe Social Security is not a good insurance
@rogram, they should not be compelled to join it. Instead, the
government;should allow them to sel e ct private sector
alternatives for Social Security's insurance functions. Forcing
more people into the system will merely increase dissatisfaction
with the program and increase the' scale of the underlying problem.
The Commission is simply suggesting th@t more people should be made
to join the chain letter ruse that is Sociai Security. The
Commission would also reduce benefits by permanently delaying the
annual cost-of-living adjustment (COLA) by six months. Although
benefit increases in the last fifteen y e ars have been excessive,
rising much faster than prices and the average wage, a benefit cut
is not the solution. Because millions of people have baseditheir
retirement plans on the expectation of receiving inflation adjust6d
benefits, delaying the annual C OLA for those now retired would
amoun:t to changing the rules in the middle of the game, and it
would impose uAfair hardship on the group least able to adjust to
sudden changes. Cutting benefits by $40 -billion would partially
shift costs to general reven u es by increasing spending on poverty
programs. Half of their Social Security benefits, recommends the
Commission, should be included in taxable income for some miadle to
upper income retirees. The rationale for this change is that:the
employer's share of t he payroll tax has escaped taxation because
it is a business expense. By including half of all Social Security
benefits' in taxable income, the tax treatment of the system would
resemble that of private pensions and other government programs.
While this p r oposal has some merit, taxing benefits would mean,
in effect, a reduction in benefits for about three million eople,
and it would penalize most those:who have taken the p precaution of
saving for their retirement. The change should only be phased in
after a reasonable grace period--it is:not a short-term option.
True reform of Social Security cannot begin'until Americans and
their Congress recognize the program for what it,really is: part
insurance and part welfare. Once this is understood, the :roblem
can be dealt p with in a manner fair to both the beneficiaries and
taxpayers. The commission's recommendations are unfair to both
4roups'and would impose substantial costs on the economy. A
successful approach to rebuilding -social Security will require
divis i on of responsibilities between the government and the
private sector, with the government maintaining the welfare aspects
of the program (albeit in a more-efficient manner) and increased
private sector participation fulfilling the program's insurance
func tion. only in that way can the fears of curtent beneficiaries
be reduced and the younger workers of today anticipate secure
retirement years.